Assem Mahadeen, and Rafaat Mahadeen v. Minister of National Revenue, [1982] CTC 2859, 82 DTC 1870

Guy Tremblay:—These appeals were heard on common evidence on April 27, 1982, at the City of London, Ontario.

1. The Point at Issue

The point at issue is whether each of the taxpayers is correct in considering the amount of $12,979 as a capital gain received in 1975 as their share of the profit from a partnership known as “Deenbar Investments”, on the sale of a property located in London, Ontario. This property was purchased in May 1974 and sold in March 1975.

2. The Burden of Proof

2.01 The burden is on the appellants to show that the respondent’s assessments are incorrect. This burden of proof results particularly from several judicial decisions, including the judgment delivered by the Supreme Court of Canada in Johnston v MNR, [1948] CTC 195; 3 DTC 1182.

2.02 In the same judgment, the Court decided that the assumed facts on which the respondent based his assessment or reassessment are also deemed to be correct. In the present case, the assumed facts are described in the replies to notice of appeal as follows:

6. In reassessing the Appellant as aforesaid, the Respondent relied, inter alia, upon the following findings or assumptions of fact:

(a) “Deenbar Investments” purchased the subject property together with adjoining property municipally known as 74 - 93 Arbour Glen on or about May 14, 1974;

(b) on or about March 7, 1975, “Deenbar Investments” sold the subject property

to J and F Goose for total proceeds of disposition of $351,000;

(c) the cost of the subject property was not greater than $293,016;

(d) outlays and expenditures with respect to the disposition in 1975 of the subject property were not greater than $6,068;

(e) the sum of $51,916 was income of “Deenbar Investments” in the 1975 taxation year, of which each partner’s share is % or $12,979;

(f) at all material times, and in particular at the time of acquisition of his interest in the subject property, the Appellant had the intention of dealing in, trading in, or otherwise turning the property to account for profit;

(g) at all material times, the Appellant had in mind the possibility of re-selling the subject property as an operating motive for the acquisition.

3. The Facts

3.01 In 1974, the appellants with two brothers, Darwa Chahbar and Adna Chahbar, bought the partnership known as Deenbar Investments, a 38- townhouse property located in the City of London, Ontario. There were two buildings: one was an 18-unit complex and one was a 20-unit complex. In 1975, the 18-unit complex was sold. The latter is the subject property involved in the present case.

3.02 The price was paid with money received from a fire insurance company as indemnity for the destruction by fire of a hotel in 1973. This hotel, which was located in Woodstock, had been purchased in 1969 by the four partners.

3.03 According to the appellants, their intention at the time of purchase of the townhouse property was to replace the investment made in the hotel. Their intention was not to resell but to keep it as an investment. It was treated as a fixed asset by the accountant. Depreciation was taken on it.

3.04 The 18 townhouses were rented at the time of purchase. It was their first experience in townhouse property. The partners had not considered all the problems involved in such a property: doing the maintenance, cutting the grass, collecting the rent, taking all the calls from the tenants, their complaints, etc. The main problem had to do with the roof and the sewer system.

3.05 In July 1974, water was leaking from the roof in an apartment of the 18-unit complex. Mr L Blythe, a roofer, did the repairs for $600 (Exhibit A-1). He told Mr Rafaat Mahadeen: “. . . if (you) can get rid of those units (you) would be further ahead to sell them, because in the future it will cost (you) too much money to put a new roof on.” (SN page 8). The same Mr Blythe signed an affidavit dated March 31, 1982, that in 1975 he had informed Mr Mahadeen that the roof needed major repairs and that it would be wise to sell the property (Exhibit A-2). The respondent admitted this affidavit as an Exhibit. In fact, the partners changed the roof of the 20-unit property. More- over, Mrs Fania Goose, the purchaser of the subject property in 1975 and witness for the respondent, testified that the property needed a new roof at the cost of $25,000 as “Nick Roofing” told her. Moreover, Mrs Goose said that every year she had to spend from $900 to $1,200 to patch up the roof and clean the sewers.

3.06 Concerning the sewers, the problem was that the “sewage used to back up” (SN page 10). This occurred in one unit of the subject property (18-unit complex) and in many other units of the 20-unit complex.

3.07 Mr Assem Mahadeen daid that prior to commencing any repair work, they received an offer for the disposition of the subject property. The offer was $19,500 per unit; they had paid $16,500 per unit. At the time the offer in question was submitted, there was no listing agreement in effect with any realtor. The realtor who approached them with Mrs Goose’s offer was Asset Real Estate, the same “which we bought the townhouses from.” (SN page 11, lines 20 and 21).

3.08 In cross-examination, Mr Assem Mahadeen explained:

(a) He had been part-owner of Hassan Steel since 1977 which in 1975 was associated with the corporation Mahadeen Brothers Limited.

(b) He and his brother are the sole shareholders of Mahadeen Brothers Limited, a company incorporated in 1974.

(c) Also, in June 1974, the appellants and one of the Chahbar brothers bought the Empire Hotel in St Thomas. It was sold afterwards but it seems without profit. (S N page 19)

(d) In 1974, Mr Chahbar approached the appellants regarding the 20-unit complex.

(e) The appellants looked at the financial statements of the former owner and were Satisfied with the rental profits. However, the witness did not remember the quantum of the said profits. The appellants did not ask their accountant how much money they were going to make (S N page 27, lines 21 and 22).

(f) They saw the buildings from the outside and they bought the properties without seeing the interior —“. .. that was the biggest mistake we made.” (S N page 21, lines 23 and 24). In fact, they relied on the opinion of Mr Asset, the real estate salesman.

(g) Pursuant to the 1975 financial statement (May 31, 1975) of Deenbar Investments (Exhibit R-2), the gross rental income was $64,961.08 and the total expenses were $69,929.95 (including the mortgage interest of $28,994.88 and the depreciation of $16,039.50).

(h) The witness said that personally he did not list the subject property with any real estate company. However, he did not know if any of his partners had. (S N page 37, lines 22 to 27).

(i) Mahadeen Brothers Limited purchased a three-storey shopping plaza for $54,000 or $53,000 in 1978. They were approached by a salesman of Royal Trust Company. They had difficulties with the air-conditioning system. It was to cost $12,000 to change it. When they bought the plaza, it was vacant. It was vacant when they sold it and is still vacant in 1982.

3.09 Mr Rafaat Mahadeen, the second appellant, testified that:

(a) The subject property was 7 to 9 years old in 1974.

(b) They figured ten percent of the rent:

Q. Did you think that it would prove to be an economical investment?

A. Well, at that particular time, sir, we figured, like, ten per cent, if we net ten per cent of the rent, but we didn’t take into consideration, like, the gross and the expense, but we figured if we bought it, like, at $17,500 and we are renting it for $185 this is ten per cent. (S N page 43, lines 17 to 24).

(c) At the time of the purchase they did not speak of reselling, but of having a rental income.

3.10 Concerning the sale of the subject property, Mrs Goose, the purchaser said that:

(a) In October 1974, a real estate broker approached her about the subject property.

I knew the property was built, I knew the builder when he built and I liked it because the style is European, built like in France with the balconies and everything and I just made up my mind that that is what I wanted, like, when everything is right I could buy it. (S N page 50, lines 22 to 27).

(b) She never met and did not know of the appellants.

(c) She never saw a listing agreement indicating that the property was for sale.

(d) She did not inspect the inside of the units before the purchase.

(e) She had the financial statements of the owners concerning the property, but she:

. .. never even counted it because the proposition was I liked to buy and I was looking for profit and I was not looking for loss, I wanted to buy this property. (S N pages 53 and 54).

4. Law — Cases at Law — Analysis

4.01 Law

The main provisions of the Income Tax Act, SC 1970-71-72, c 63, as amended, involved in the present case are section 3 and subsections 9(1) and 248(1) (definition of “business”). The latter reads as follows:

248. Definitions.

(1) In this Act,

“Business”.—“business” includes a profession, calling, trade, manufacture or undertaking of any kind whatever and includes an adventure or concern in the nature of trade but does not include an office or employment;

4.02 Cases at Law

The cases at law to which the counsel for the parties referred are as follows:

1. Paul Racine, Amédée Demers and François Nolin v MNR, [1965] CTC 150; 65 DTC 5098;

2. GA Lorenzon et al v MNR, [1981] CTC 2592; 81 DTC 479;

3. William Moldowan v HMQ, [1977] CTC 310; 77 DTC 5213;

4. Regal Heights Ltd v MNR, [1960] CTC 384; 60 DTC 1270;

5. Morev Investments Ltd v MNR, [1972] CTC 513; 72 DTC 6421.

4.03 Analysis

4.03.1 Many times the courts emphasized the different factors involved in a case of this nature to determine whether the profit of the transaction must be treated as an income or capital gain: intention, relation of transaction to taxpayer’s business, nature of transaction and assets involved, number and frequency of transactions, period of ownership. The intention is determinative. The other factors are useful to determine the intention.

4.03.2 The declared intention of the appellants in purchasing the subject property is obviously in favor of the thesis in their testimony (see paragraphs 3.03, 3.08(c)). However, such testimony or even a declared intention in a contract is not conclusive.

The short period of ownership of the subject property (less than 12 months, see paragraph 3.01) is rather in favor of the respondent’s thesis. The respondent’s counsel emphasized the fact that the subject property was a loss-producing property (see paragraph 3.08(g)). How could it be purchased as an investment? The appellants did not inspect the property; they only looked at the financial statements. They relied on the opinion of the real estate salesman (see paragraphs 3.08(e) and (f)).

Mrs Goose did not inspect the subject property either. She bought it because she liked it: the style was European and she knew the builder (see paragraph 3.10(a)). It seems that for some people it is not a must to inspect a building before purchasing it. Those persons ordinarily have no experience in that kind of transaction. Such was the case for the appellants in 1974.

4.03.3 Some elements seem to confirm the declared intention of the appellants. A building is not a commodity. By its nature it is an investment. Moreover, the properties were purchased to replace the investment made in 1969 in a hotel which burned in 1973. They used the indemnity to purchase the subject property. The evidence given about the problem of the roof is clear (see paragraph 3.05). The appellants alleged it was one of the reasons for selling. They bought two properties and they sold one when they received the offer for $19,500 per unit. They had purchased it for $16,500 per unit. There was no listing agreement. They still owned the other property.

The Board thinks that the preponderance of the evidence is in favor of the appellants’ thesis.

5. Conclusion

The appeal is allowed and the matter referred back to the respondent for reassessment in accordance with the above reasons for judgment.

Appeals allowed.